The profitability of banks has plummeted. And only the loose monetary policy of the ECB has improved the results. That is underscored by a report on the performance of Spanish banks by International Financial Analyst (AFI).

The report estimates the Spanish banking sector accumulated €238 Billion poor credit and foreclosed assets (8.8% of the balance), with coverage average of 44%.

Only the ECB's monetary policy, its strategy of zero interest rates and asset purchase, keeps the banks alive.

The ROE of the banking sector, has been reduced by 6.8 points, reaching levels of 5.3%, mainly due to higher capital requirements.

As the report makes clear, higher capital requirements (to maintain solvency) are here to stay, so it is difficult for the results of the fixed income portfolios in recent years to be repeated in the short term.

In fact, unrealized gains associated with these portfolios have declined more than 50% in 2015. This means that banks are eating the benefits associated with the decline in interest rates.

In the words of AFI, ECB monetary policies have contained the fall in the profitability of the sector in recent years, and this has benefited "substantially" the peripheral countries including the Spanish banking system.

Non-performing assets could be reducing the annual profitability of the sector up by 5.4 percentage points according to the report.

With treasury yields low or negative in Eurozone countries, the recapitalization benefits of ECB policy (banks loading up on their own sovereign bonds) have run their course. In case of another downturn, there will be little else the ECB can do.
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Mike "Mish" Shedlock

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